Analysis: Ryanair focuses on the future

Although just an unassuming country far from the spotlight, little Ireland occasionally produces the odd world-acknowledged wonder. Think of Arthur Guinness's redoubtable brewery, followed by author James Joyce, multi-platinum rockers U2 and now, perhaps -- Ryanair.

The upstart low-cost carrier has become Europe's most profitable -- by offering fares under 75 cents.

In 1990, imitating Southwest Airlines, Ryanair became a "no frills" airline. Besides flying to smaller airports, the usual cost-cutting tactics (no paper tickets, no passenger meals, no pre-arranged seating) were employed. However, according to Ryanair, industry deregulation and the Internet were also key.

In 1997, EU airlines deregulation allowed Ryanair to go continental. By 2000 the company had started online bookings- today, 94 percent of sales. The company plans to purchase up to 150 new Boeing aircraft by 2010.

According to the Guardian, April-June profits hit a record $48.8 million (43.8 million euros,) a 12 percent jump in profits and a 45 percent rise in passengers (to 5.1 million). However, the proportion of seats filled -- the so-called "load factor" -- decreased by 5 percent (to 78 percent of capacity). And while total revenues increased by a quarter to $273.5 (245.2 million euros,) average yields fell by 14 percent, to $46.6 (41.71 euros.)

Ryanair blamed the drops on its recent addition "...of 50 new routes, the weakness of sterling against the euro, the one-month closure of recent acquisition Buzz, and cheaper fares."

Upcoming annual yields may be 10-15 percent below 2002 figures, but CEO Michael O'Leary remained optimistic, stating that, "...during what BA last week described as the most testing period in aviation history, we continue to drive down airfares, reduce costs, but at the same time deliver increased profits and exceptional margins."

Indeed, a July analysis by Raymond James and Associates gave Ryanair a "strong buy" status, projecting a 2004 passenger volume increase of 49 percent.

Predicting that low yields will be temporary, the firm pegged Ryanair's growth to reach the 20-25 percent mark in fiscal 2005, and to remain there for 6-8 years. The company has "by far the lowest costs," owns all of its aircraft, and holds net cash of $318.6 million (286 million euros.) Ryanair management is the "most disciplined and focused in the industry," according to RJA, which reminds that budget airlines currently account for only 8 percent of Europe's air travel market.

Competitors are, with good reason, concerned.

European leader British Airways suffered a debilitating worker's strike on 18 July, incurring losses of 45 million pounds. The recent advertising strategy of highlighting customer care, meant to distance BA from the budget carriers, blew up in its face when confronted by tens of thousands of angry, stranded passengers. It took 5 days to restore order, and competitors -- especially Virgin Atlantic, Ryanair and easyJet -- profited from sinking confidence in BA.

Servicing almost 100 countries, BA is vulnerable to world upheaval. The Sept.11 attacks and subsequent downturn in American business, followed this year by SARS, have done considerable damage. Most recently, on Aug. 13, BA suddenly cancelled flights to Saudi Arabia, citing the danger of al Qaeda attacks.

Adding to this air of unpredictability was a recent U.S. security directive ordering all foreign transit passengers to obtain a U.S. visa -- even if they weren't planning to leave the airport. Airlines were left scrambling to reroute their passengers on very short notice.

Although BA hopes the worst is behind, the "swipe card" controversy which originally fomented labor unrest has merely been deferred, not solved. "Ananova" reported Thursday that BA's 4,000-strong engineers' union will vote on accepting a pay raise or going on strike. Their answer is expected by mid-September.

The Greek-owned airline, which operates 106 routes compared to Ryanair's 125, offers misleading statistics. According to "Ireland On-Line," a 75 percent increase in passengers carried in July (1.9 million) owes to the company's takeover of Go, a former BA subsidiary. Taking figures for both companies together, "...the rise was a more modest 9 percent."

There are other competitors. Ireland's state-owned Aer Lingus, "...is being radically restructured in order to ensure its survival" against Ryanair, according to the "Financial Times." It plans to renew its short-haul fleet with up to 27 new planes from Boeing or Airbus.

Aer Lingus's first-half 2003 operating profit of $15.9million (14.3 million euros) shines compared to a 2002 operating losses of $14.03 million(12.6 million euros.) 2003 should see a $83.5 million (75 million euro) profit -- increasing from $71 million (64 million euros) last year.

Yet even as it adds 16 new European routes, Aer Lingus has ended domestic flights within Ireland- thus conceding victory to Ryanair at home. The battle has moved to the continent.

Indeed, lest Michael O'Leary start to fancy himself too much the lucky lad, recent headaches show that antagonists linger.

The European Union is investigating Ryanair's activities at Charleroi Airport in Brussels, claiming it received illegal state subsidies. A French court recently announced a similar investigation of Ryanair's relationship with Strasbourg Airport.

O'Leary deemed this "ludicrous," considering that Air France has withdrawn 10 international services since 1996, "...one of which was the London route." He blamed high-cost airlines in their "death-throes" for lobbying politicians against Ryanair.

According to O'Leary, Ryanair will leave both airports rather than pay higher landing fees or legal costs. However, a recent analysis from the Times of London, citing Civil Aviation Authority figures, offered another interpretation: "...since a peak last August, passenger numbers (at Charleroi) have plummeted 41 percent and, despite withdrawing some aircraft, the crucial load factor is down 29 percent."

According to the Guardian, the low-cost airlines may be expanding too quickly, thereby necessitating lower fares and- lower profits.

It's clear that not everyone can go "low-cost" and survive. Lufthansa's new budget subsidiary probably won't succeed, and an Irish start-up called FreshAer -- a low-cost, "with frills" airline -- has doubtful prospects.

Market saturation is not far off for budget airlines in Western Europe. Ryanair is expanding too fast, perhaps, but it must. Unfortunately, however, its 50 new routes are not taking the company in the right direction.

To really fulfill its dream of being Europe's leading airline, Ryanair must expand south- to Greece and Turkey.

Myriad European tourists summer in these countries, which have a combined population of around 70 million. Flights to Istanbul and Athens would be profitable year-round and holiday flights, from mid-April through October.

However, the ingrained resistance here would make the Franco-Belgian obstructionism seem like child's play. The stakes are higher, as Ryanair could conceivably damage the package tourism industry, dominated by European companies like Thomas Cook, Lunn Polly and Neckerman.

However, the biggest obstacle might be EasyJet, which currently services Athens. The company is owned by a Greek, Stelios Haji-Ioannou, who protects his home turf. (Similarly, EasyJet does not enter the Irish Republic). Should Ryanair take the fight to Southeastern Europe, the war will begin in earnest. Yet this will have to happen sooner or later, for unprecedented, high levels of growth to be prolonged.

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